Mostly Good Robin Hood: Impact of Financial Transaction Tax on Corporate Investment

Abstract

Research Question/Issue: This paper studies how corporate investments are affected by financial transaction taxes levied on stock trading and explores alternative corporate governance mechanisms behind the effect. Research Findings/Insights: Exploiting the 2012 French introduction of a financial transaction tax in a difference-in-differences design, I find an overall positive effect of the tax on corporate investments, namely, capital expenditure and R&D. I also find an improvement in investment sensitivity and an increase in likelihood and quality of acquisitions, particularly among firms for which the tax causes a significant shift from short-term to long-term ownership. Theoretical/Academic Implications: The evidence suggests that a financial transaction tax could have a positive effect on corporate investments by inducing long-term ownership and alleviating short-termism. The paper therefore addresses one major concern that the tax would hamper investments by increasing costs of capital or harming other governance mechanisms such as exit threats. Practitioner/Policy Implications: This study provides evidence on economic benefits of financial transaction taxes which are relevant to the debate on the tax introduction and design in many countries.